Stock corner: ‘Buy’ Lupin; Kyowa deal to boost prospects

By: |
Updated: November 18, 2019 9:26:46 AM

The share of generics by volume is ~70%, partly led by biennial price cuts of 5-7%. Japan’s government is likely to change the rule to an ‘annual review,’ which implies a further impact on profitability of the country’s generic business.

Stock corner, Buy, Lupin, Rating, Kyowa, Lupin share, Lupin limited, Lupin pharma, Lupin ltd, Lupin stock price, Lupin news, Lupin productLupin’s net debt would reduce by Rs 32 bn and net debt-to-equity would come down to 0.08x from 0.32x.

Lupin (LPC) has announced the sale of its entire stake in Kyowa Pharma to Unison, subject to customary closing conditions, including approval by the company’s shareholders. The stake will be sold at an enterprise value (EV) of Rs 37 bn, which implies EV/sales of 2x. This, in our view, is fair valuation, given the adverse pricing scenario in the Japanese generic pharma market. Net cash inflow of Rs 21 bn (post-tax) would help LPC pare debt over the near term and look for acquisitions in the focus markets of the US/India over the medium term.

We cut our EPS estimate for FY21 by only 2% to Rs 37.8 as the decrease in Ebitda due to the sale of the Kyowa business is likely to be largely offset by lower depreciation/interest cost. We continue valuing LPC at 21x 12m forward earnings to arrive at a price target of Rs 860. We remain positive on LPC, given its healthy ANDA pipeline for the US market, limited price erosion in the US base business and the steady outperformance in the domestic formulation market. Maintain Buy.

Deal to close in FY20
LPC has entered into a definitive agreement for the sale of its entire stake in its Japanese subsidiary Kyowa Pharma to Unison (a private equity fund in Japan) for an EV of ~Rs 37 bn. Kyowa delivered sales of ~Rs 17.8 bn in FY19 and ~Rs 9 bn for 1HFY20. Lupin’s net debt would reduce by Rs 32 bn and net debt-to-equity would come down to 0.08x from 0.32x.

Japan’s generic pharma facing considerable price erosion
Japan’s $13-bn generic pharma market (as of 2018) exhibited a CAGR of 9% over CY14-18. The share of generics by volume is ~70%, partly led by biennial price cuts of 5-7%. Japan’s government is likely to change the rule to an ‘annual review,’ which implies a further impact on profitability of the country’s generic business.

Kyowa outperformed industry with subdued profitability
LPC had entered Japan’s pharma market with the acquisition of Kyowa in FY08. With the takeover, it was directly able to make an entry into the top-10 generics players in Japan. Kyowa’s revenue CAGR was ~15% over FY15-19 (Rs 17.8 bn in FY19), contributing ~11% of LPC’s consol. sales. Its PAT was Rs 686 m, forming 6.5% of consol. PAT.

Valuation and view
We cut our EPS estimate for FY21 by only 2% to Rs 37.8 as the decrease in Ebitda due to the sale of the Kyowa business is likely to be largely offset by lower depreciation/interest cost. We continue valuing LPC at 21x 12m forward earnings to arrive at a price target of Rs 860. We remain positive on LPC, given its healthy ANDA pipeline for the US market, limited price erosion in the US base business and the steady outperformance in the domestic formulation market.

 

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Next Stories
1Markets may remain range-bound, global trends to dictate sentiments: Analysts
2World’s biggest IPO: Saudi oil giant Aramco eyes $1.71 trillion valuation
3Have headroom to raise Rs 35,000 crore from market: Nabard chief Harsh Kumar Bhanwala